Process: 288/2018-T

Date: February 14, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD arbitration process 288/2018-T involved a challenge to an IRS assessment of €42,812.84 for capital gains (mais-valias) from the 2016 disposal of inherited property. The claimant, acting as head of estate for the deceased taxpayer B., argued that capital gains from properties inherited in 1947 should be exempt under the transitional regime for Category G income. The taxpayer mistakenly declared the income in Annex G (taxable capital gains) instead of Annex G1 (untaxed capital gains) in the 2017 IRS declaration. During the prior hearing (audição prévia), the claimant attempted to correct this error and provide documentation proving the acquisition date and values. However, the Tax Authority (AT) claimed the right to prior hearing was not exercised and proceeded with the assessment. The claimant challenged the assessment on two grounds: (1) omission of essential formalities, arguing the AT failed to properly consider the prior hearing submissions and refused the replacement declaration; and (2) erroneous classification of income type, contending that gains from assets acquired before the implementation of the capital gains regime should be exempt from IRS taxation. The case illustrates the application of transitional provisions protecting inherited pre-regime assets from capital gains taxation and procedural rights in tax assessment processes under Portuguese law.

Full Decision

ARBITRAL DECISION

REPORT

On 18 June 2018, A..., resident at ..., in Algés, ..., as head of the estate opened by the death of B..., taxpayer number ..., hereinafter referred to as the Claimant, requested the establishment of an Arbitral Tribunal and submitted a request for arbitral pronouncement, pursuant to subparagraph a) of paragraph 1 of Article 2 and subparagraph a) of paragraph 1 of Article 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as LRAT), in which the Tax and Customs Authority (hereinafter referred to as TCA) is the Respondent.

The Claimant is represented in these proceedings by his representative, Dr. C..., and the Respondent is represented by the legal advisors, Dr. D... and Dr. E....

By means of the request for establishment of the Arbitral Tribunal and for arbitral pronouncement, the Claimant seeks a declaration of illegality and consequent annulment of the assessment act for Personal Income Tax (IRS) No. 2017..., relating to the year 2016, in the amount of € 42,812.84 (forty-two thousand, eight hundred and twelve euros and eighty-four cents), of which € 42,087.52 corresponds to tax and € 725.32 to compensatory interest.

Having verified the formal regularity of the request submitted, pursuant to subparagraph a) of paragraph 2 of Article 6 of the LRAT, and as the Claimant did not proceed to appoint an arbitrator, the signatory was designated by the Chairman of the Deontological Council of CAAD.

The signatory accepted the designation made, and the Arbitral Tribunal was established on 28 August 2018, at the headquarters of CAAD, located at Avenida Duque de Loulé, No. 72-A, in Lisbon, as confirmed by the communication of the establishment of the Arbitral Tribunal which is attached to these proceedings.

After being notified for this purpose, the Respondent submitted, on 4 October 2018, its reply, in which it presented its defence, by way of exception and contestation.

By order of 12 October 2018, the Tribunal, in respect of the principle of contradictory proceedings, notified the Claimant to pronounce itself on the exceptions invoked by the Respondent.

On 24 October 2018, in response to the order indicated above, the Claimant submitted a petition in compliance therewith.

As there was no need for the production of additional evidence, beyond that which was already incorporated in the proceedings as documentary evidence, and as it did not appear necessary for the parties to correct their respective procedural documents, with the process having all the elements necessary for the issuance of a decision, for reasons of economy and procedural expedience and the prohibition of useless acts, the Tribunal deemed it appropriate to dispense with the holding of the meeting referred to in Article 18 of the LRAT, in the order it issued on 7 November 2018, granting therein a successive period of 10 days for the Claimant and the Respondent, in that order, to submit their respective written arguments.

In that order, the Tribunal, in compliance with paragraph 2 of Article 18 of the LRAT, set 28 February 2019 for the issuance of the arbitral decision, and warned the Claimant that it should proceed with payment of the subsequent arbitration fee, pursuant to paragraph 3 of Article 4 of the Rules of Costs in Tax Arbitration Proceedings, and notify CAAD of such payment.

The Claimant and the Respondent submitted their arguments on 13 November 2018 and 26 November 2018, respectively.

By oversight, on 28 November 2018, the Tribunal issued an order directing the Claimant to submit a defence regarding the exceptions invoked by the Respondent, when such position had already been duly manifested in the petition identified above which the same had submitted. Faced with this futility and upon detecting such oversight, the Tribunal, through the order of 4 December 2018, rendered the aforesaid order void.

On 5 December 2018, the Claimant submitted a petition reiterating all of its argumentation already expended in the course of these proceedings.

II. The Claimant's Arguments

The Claimant supports its claims, in summary, as follows:

The Claimant sustains the request for annulment of the implied rejection of the administrative complaint No. ...2018... and of the IRS assessment act No. 2017..., relating to the year 2016, in the amount of € 42,812.84 (forty-two thousand, eight hundred and twelve euros and eighty-four cents), which includes the respective compensatory interest as illegal, on the grounds that it suffers from the following defects:

Defect of omission of an essential formality, in that "(...) by oversight, the taxpayer declared, in May 2017, the income earned in 2016, from the disposal of the quota share of the aforementioned properties, in Annex G (capital gains and other increments in assets) of the annual income declaration, IRS Form 3, instead of, as would be correct, presenting the aforementioned income in Annex G1 (untaxed capital gains). This declaration error resulted in the Tax Authority (TCA) initiating an IRS assessment process, with the objective of determining the amount of tax due, since the income was declared, by oversight, as income subject to IRS."

According to the Claimant, "on 8 November 2017, in the context of the IRS assessment process initiated by the TCA, the taxpayer was notified to exercise the right to prior hearing, because the TCA identified the existence of possible discrepancies in the acquisition values and discrepancies in the year of acquisition of the properties. On 22 November 2017, the present Claimant, as head of the estate of the taxpayer, who had since passed away, exercised the right to prior hearing," expressing "the availability to replace the IRS declaration Form 3, presenting Annex G1, with the income from untaxed capital gains and attached documents proving the date and value of acquisition of the quota share of the properties."

Consequently, the Claimant states that, on 2 December 2018, "(...) resent the electronic message through which he had exercised the right to prior hearing and, additionally, clarified that he had also sent a copy of the aforementioned message 'to your technician Mr. F... who attended to me personally in your facilities and advised me to send the reply by email'. On 4 January 2018, he was notified of the tax assessment act No. 2017...".

Indeed, in mid-December 2018, the Claimant was notified of the final decision regarding the official correction of the IRS declaration, Form 3, for the year 2016, with the identification ..., which states that "the right to prior hearing was not exercised, pursuant to Article 60 of the General Tax Law and Article 60 of the Supplementary Tax Inspection and Customs Procedure Regime, and the head of estate in representation of the deceased taxpayer did not proceed to submit any replacement declaration."

Furthermore, the Claimant states that "on 5 January 2018 he submitted an administrative complaint against the aforementioned tax assessment act, through the Tax and Customs Portal, where he reproduces the content of the exercise of the right to prior hearing."

Concluding that "the tax assessment act now being challenged is illegal, because it suffers from the defect of omission of essential formalities."

The Claimant also alleges the defect of erroneous classification of the type of income, arguing that: "[o]n 27 June 2016, (...) in his capacity as representative of B..., he disposed of the quota share that his principal owned in the urban properties identified below: (...)". Indeed, "[t]he quota share of the three properties previously identified had been acquired by B..., as heir of G..., who died on 26 March 1947."

The Claimant continues, by way of conclusion, to the effect that: "And, being thus, it is a notorious fact that the income earned in 2016, from this onerous disposal of the quota share of the 3 properties identified above, is not subject to taxation under IRS, by virtue of the provisions of Article 5 of Decree-Law No. 442-A/88 of 30 November."

Concluding that "(...) the tax assessment act now being challenged is illegal, because it suffers from the defect of erroneous classification of the type of income and, consequently, should be annulled, on the grounds of Article 99, subparagraph a) of the CPTA, applicable by virtue of Article 70, paragraph 1 of the CPTA."

III. The Respondent's Reply

For its part, the TCA, in its reply, defends itself, by way of exception and contestation, as follows:

By exception, the Respondent invokes the lack of object of the request for arbitral pronouncement, arguing that "the Claimant was notified of the rejection of the hierarchical appeal through the office of 27.04.2018, and that the administrative complaint No. ...2018..., was filed away officially, with a new administrative complaint being instituted in the name of the head of estate, to which the number ...2018... was assigned. This means that the Claimant was duly notified of the official filing away of the administrative complaint No. ...2018..., under the cover of Office of 27.04.2018. Now, at the date the Claimant filed the present request for arbitral pronouncement on 18.06.2018, the period for consideration of the administrative complaint No. ...2018... was still running."

The Respondent continues by stating that "(...) in addition to the Claimant indicating as the act under scrutiny the implied rejection of an administrative complaint that was filed away officially, it filed the present request for arbitral pronouncement, without having exhausted the 4-month period provided in paragraph 1 of Article 57 of the LGTT. Therefore, the present request for arbitral pronouncement lacks an object, in that the formation of the presumption of implied rejection of the Administrative Complaint No. ...2018... had not yet occurred. (...) the implied rejection of the administrative complaint ...2018..., would only occur – and unless we are mistaken in our counting – on 28.08.2018.", concluding that "[h]aving the Claimant submitted the request for arbitral pronouncement on 18.06.2018, it is apparent that the same was brought well before the implied rejection occurred -28.08.2018. (...) In this regard, the lack of object persists which constitutes a peremptory exception, which is invoked for all legal purposes, pursuant to the provisions of paragraph 3 of Article 577 of the Civil Procedure Code, as amended by Law No. 41/2013, of 26 June, applicable by virtue of Article 1 of the CPTA, which gives rise to the dismissal of the respondent's claim pursuant to the terms and purposes set out in paragraph 3 of Article 576 of the Civil Procedure Code."

By contestation, the Respondent defends itself, regarding the invoked defect of omission of essential formality, that "(...) from the evidence adduced by the Claimant in these proceedings, in particular with document No. 6, in confrontation with the documents presented by the Respondent entity, it clearly emerges that the right to prior hearing was not exercised. In the first place, the Claimant alleges that it exercised the right to prior hearing on 22.11.2017, and for this purpose attached document No. 6. However, it is important to note immediately that the Claimant did not present any proof of delivery regarding the right to prior hearing on 22.11.2017, when it was incumbent upon it in light of the burden of proof provided for in Article 342 of the Civil Code and Article 77 of the LGT. Moreover, as is noted on document No. 6, the date of 08.01.2018. That is, the Claimant did not exercise the right to prior hearing, having neither provided proof nor attached proof of the sending of the email on 22.11.2017."

Concluding that "[i]n this regard, it is apparent that, contrary to the arguments put forward by the Claimant, the exercise of the right to prior hearing was not disregarded, in that the claimant did not prove that it exercised the right to prior hearing, with document No. 6 not being suitable to demonstrate such a claim inasmuch as it bears the date of 08.01.2018, and the Respondent entity did not receive the email of 22.11.2017."

Regarding the alleged defect of erroneous classification of the type of income, the Respondent states that "(...) document No. 6, given its illegibility and incompleteness, does not allow for a pronouncement on the substantive question, that the properties would have been acquired free of charge in a partition process approved by a judgment of 06.12.2014 and were disposed of on 27.06.2016, whereby such onerous disposal is not subject to taxation under IRS, by virtue of the provisions of Article 5 of Decree-Law 442-A/88 of 30 November."

In its written arguments, and after document No. 4 was attached to the proceedings in legible form, following the Tribunal's order to that effect, the Respondent adds that "[a]ccording to the evidence adduced by the claimant, in particular document No. 6 [by oversight the Respondent referred to document No. 6, when in reality it intended to mention document No. 4], it is apparent that the properties corresponding to the previous cadastral items No. 180 and 181 are 'land occupied by a property in ruins'. For purposes of exemption in the context of capital gains and under IRS, it was incumbent upon the Claimant to have adduced evidence that such properties (...) were urban properties and not land for construction, that is, to assess the exemption under IRS there would have to be evidence that prior to the entry into force of the IRS Code, which occurred on 1 January 1989, such land was classified as an urban property and not land for construction, since only the appreciation of such type of land was taxed in the context of the Capital Gains Tax."

Concluding that "it is clear that the tax acts in question are valid and lawful and no error occurred that could be attributed to the services."

IV. Preliminary Matters

The Tribunal is competent and regularly constituted, pursuant to subparagraph a) of paragraph 1 of Article 2 and Articles 5 and 6, all of the LRAT.

The parties have legal personality and capacity, are legitimate and are regularly represented.

V. Facts

With relevance for the decision, the following facts are deemed proven:

  1. B... acquired, on 6 March 1947, the urban properties registered under articles..., ... and ... (articles..., ... and ..., in 2016) of the parish of..., municipality and district of Lisbon, by inheritance opened by the death of G..., by virtue of the partition process validated by judgment on 06.12.1948, which became final on 21.12.1948. – See Document No. 4 attached with the request for establishment of the Arbitral Tribunal, in copy, but legible in the proceedings by the Claimant – ;

  2. On 27 April 1947, the process for inheritance and gifts tax was instituted at the Tax Office of..., to which the number... was assigned, due to the death of G... – see Document No. 4 attached with the request for establishment of the Arbitral Tribunal – ;

  3. The cadastral articles..., ... and ... relating to the urban properties located in the parish of Pena, on the date of 1948, correspond to the cadastral articles..., ... and ... respectively, on the date of 2016 – see Uncontested fact – ;

  4. On 27 June 2016, the Claimant, in his capacity as representative of B..., disposed of the quota share of which his principal was the owner, in the urban properties registered under articles..., ... ... of the parish of..., municipality and district of Lisbon – see Documents No. 2 and 3 attached with the request for establishment of the Arbitral Tribunal – ;

  5. In May 2017, B... submitted her IRS declaration Form 3, relating to the year 2016, to which the identification number... was assigned, having declared in Annex G the income earned from the aforementioned disposal – see Uncontested fact – ;

  6. On 13 November 2017, the Claimant was notified, by letter with the registered receipt number of the postal service No. RD ... PT, dated 08.11.2017, to exercise the right to prior hearing that he held regarding the intention of the TCA to proceed with corrections to the values entered in the Declaration Form 3 mentioned above. – Document No. 1 attached with the Reply – ;

  7. On 03 December 2017, B... died – see administrative proceedings – ;

  8. The Claimant was notified, through Office No. DFLisboa ..., dated 21.12.2017 from the Tax Office of Lisbon that, "by order of 2017/12/15, (...) the IRS declaration, Form 3, for the year 2016 with the identification ... will be officially corrected (...)" – see Document No. 7 attached with the request for establishment of the Arbitral Tribunal – ;

  9. On 4 January 2018, the Claimant was notified of the IRS assessment statement No. 2017..., dated 22.12.2017, of the compensatory interest assessment statement No. 2017..., dated 28.12.2017, and of the account settlement statement No. 2017..., dated 28.12.2017, from which a tax payable in the amount of € 42,087.52 accrued plus compensatory interest in the amount of € 725.32, with the payment due date of 07.02.2018. – see Document No. 1 attached with the request for establishment of the Arbitral Tribunal and consultation of the registered receipt – ;

  10. On 5 January 2018, the Claimant submitted, in the name of B..., the Administrative Complaint to which the number ...2018... was assigned against the assessment act in question in these proceedings – see administrative proceedings – ;

  11. On 12 January 2018, the Claimant submitted a new administrative complaint in the name of B..., to which the number ...2018... was assigned with the same grounds and against the same assessment act in question in the context of the administrative complaint identified above. – see administrative proceedings – ;

  12. On 5 March 2018, the Claimant was notified, through the Office dated 27.02.2018, that "on 26-02-2018 an order for filing away was issued by the Head of the Tax Office, under delegation of powers" in the context of the administrative complaint identified above, motivated by the duplication of procedures – see administrative proceedings – ;

  13. On 7 March 2018, the Lisbon Tax Office proceeded with the filing away of the administrative complaint identified above given that it had been instituted in the name of B..., already deceased, and instituted a new administrative complaint process with the same grounds and against the same assessment act in the name of the estate of that taxpayer – see administrative proceedings – ;

  14. On 2 April 2018, the Claimant submitted, before the Tax Office of Oeiras ..., a hierarchical appeal to which the number ...2018... was assigned against the decision to file away the administrative complaint procedure No. ...2018... . – see administrative proceedings – ;

  15. On 6 April 2018, the Tax Office of Oeiras ... instituted officially the administrative complaint procedure to which the number ...2018... was assigned, in the name of B..., Head of Estate of, TIN..., which was forwarded to the Lisbon Tax Office – Administrative Justice Division. – see administrative proceedings – ;

  16. On 10 May 2018, the Claimant was notified of the decision regarding the rejection of the hierarchical appeal identified above. – see administrative proceedings – ;

  17. On 18 June 2018, the Claimant submitted, before CAAD, a request for arbitral pronouncement which gave rise to the present proceedings.

VI. Facts Deemed Not Proven

It was not deemed proven that the Claimant exercised the right to prior hearing on 22 November 2017, pursuant to Article 60 of the General Tax Law, inasmuch as the same failed to demonstrate and prove the receipt, by the Respondent, of the email through which the right was allegedly exercised, nor presented a copy of any possible petition for exercise of such right, duly received by the competent services.

Indeed, notwithstanding document No. 6 being attached, which is the email through which the Claimant allegedly exercised the right to prior hearing, the truth is that, according to the Respondent's defence, the same did not reach its destination.

The Respondent states that it only became aware of the aforementioned email on 4 January 2018, due to its forwarding to the Lisbon Service Office, confirming only the receipt of the latter.

Thus, and being a contested fact, this Tribunal deems it not proven that the Claimant exercised the right to prior hearing on 22 November 2017.

There are no other facts deemed not proven; however, this Arbitral Tribunal understands that all relevant facts for the assessment of the claim have been deemed proven.

VII. Reasoning Regarding the Proven Facts

For the conviction of the Arbitral Tribunal, regarding the proven facts, the documents attached to the proceedings and the administrative proceedings proved relevant, all analyzed and weighed in conjunction with the pleadings, from which there is agreement regarding the factuality presented by the parties, pursuant to paragraph 7 of Article 110 of the CPTA.

It should be noted that, regarding the facts, the Tribunal does not have to pronounce itself on everything that was alleged by the parties, with the duty instead falling upon it to select the facts that matter for the decision, to distinguish the proven facts from the unproven ones [see Article 123, paragraph 2 of the CPTA and paragraph 3 of Article 607 of the Civil Procedure Code, applicable by virtue of Article 29, paragraph 1, subparagraphs a) and d) of the LRAT].

Thus, the relevant facts for the judgment of the case are selected based on their legal relevance, which is established based on the various solutions of the legal question(s) to be discerned. [see Article 596 of the Civil Procedure Code, applicable by virtue of Article 29, paragraph 1, subparagraph e) of the LRAT].

VIII. Grounds of Law

I. Preliminary Issue

The Respondent, in its reply, defends itself by invoking the exception of "lack of object of the request for arbitral pronouncement", arguing for this purpose that "the Claimant was notified of the rejection of the hierarchical appeal through the office of 27.04.2018, and that the administrative complaint No. ...2018..., was filed away officially, with a new administrative complaint being instituted in the name of the head of estate, to which the number ...2018... was assigned. This means that the Claimant was duly notified of the official filing away of the administrative complaint No. ...2018..., under the cover of Office of 27.04.2018. Now, at the date the Claimant filed the present request for arbitral pronouncement on 18.06.2018, the period for consideration of the administrative complaint No. ...2018... was still running."

Let us see whether the Respondent is correct.

It is true that, as the Respondent states, when the Claimant submitted the request for establishment of the present Arbitral Tribunal, on 18.06.2018, the period for the consideration of the administrative complaint No. ...2018... was still running.

However, we can state from the outset that the challenge of the implied rejection before its formation does not appear to raise significant problems in doctrine and in the jurisprudence of our courts. It would be problematic if the challenge were submitted after the legally granted period, that is, after the period expired for this purpose, following the verification of the implied rejection, which in such case we would be faced with a situation of expiration of the right to challenge/bring an action.

Indeed, and on this matter, Jorge Lopes de Sousa clarifies, in Tax Procedure and Process Code, Annotated and Commented, Vol. II, 6th Edition 2011, Áreas Publisher, p. 198, which this Arbitral Tribunal fully endorses, that:

"It may be argued that, before the implied rejection is formed, it is not possible to proceed with its challenge. In reality, in cases of implied rejection, it is this fiction of rejection that is the immediate object of the challenge process and, if it does not exist, the challenge will lack an object, which makes the dispute impossible, at least in theory. However, it has been understood that, even after submitting an administrative complaint and before its decision or formation of implied rejection, the taxpayer may directly challenge the assessment act, provided that he does so within the period provided for direct challenge of this act.

However, in cases where the judicial challenge was brought having as object a hypothetical implied rejection of an administrative complaint that did not yet exist, if, at the moment the challenge is to be assessed, the implied rejection has already been formed, it appears there is no obstacle to that formation of implied rejection that is subsequent in relation to the moment of submission of the challenge being taken into account, since judicial decisions must 'take into account the constitutive, modifying or extinguishing facts of the right that occur subsequently to the filing of the action, so that the decision corresponds to the situation existing at the moment of the closure of the discussion' (Article 663 of the Civil Procedure Code). That is, even if one considers it essential that an implied rejection be formed to enable the judicial challenge of the assessment act (the only truly existing act), it would not be justified to declare the expiration of the right to action when, by that implied rejection having been formed, the extended period of judicial challenge resulting from the submission of the administrative complaint and the lack of its decision could already be used."

Continuing, that Author states that:

"On the other hand, that understanding, if it is correct regarding primary acts (rejection of a claim without a prior administrative act having as its object the legal situation at issue), does not appear to be so regarding second-degree acts (acts that have as their immediate object other acts), as is the case of the decision rejecting an administrative complaint, which has as its object the assessment of the legality of an assessment act.

In reality, having the administrative complaint as its object an assessment act, the object of the judicial challenge process of implied rejection of an administrative complaint, although formally is the implied rejection, is indirectly the assessment act that was the object of the complaint, and it is precisely this assessment act, in cases of implied rejection, the only one whose legality can be assessed in the judicial challenge process. Being thus, when an administrative challenge to an assessment act is submitted, it should be understood that the interested party may not wait for the respective decision to be issued, being able to opt for the contentious challenge of the administratively challenged act, even before the legal period for deciding the complaint has expired, on the basis of the principle "that periods, not being able to be exceeded, can, as a rule, be anticipated", provided that the act that is the object of the challenge (in this case the assessment) has already been practiced." (Emphasis added).

Concluding as follows:

"Moreover, the reasons of security and legal certainty, which are what underlie the expiration of the right of contentious challenge, cannot explain that such right be extinguished before the moment when such reasons override the right of contentious challenge, that moment being the end of the period in which the challenge is permitted.

The most appropriate solution, which must be presumed to have been legislatively established (Article 9, paragraph 3 of the Civil Code), is the one that best ensures the possibility of recognition of individual rights, which should be the primary purpose of the public service of tax justice, without affecting in an intolerable manner the public interest in the swift definition of the legal situations in which the collection of revenues intended to meet public needs is at issue.

That most appropriate solution is manifestly the one that 'when an administrative complaint to an assessment act is submitted, the interested party may opt not to wait for the respective decision to be issued, being able to opt for the contentious challenge of the administratively challenged act, even before the legal period for deciding the complaint has expired, on the basis of the principle "that periods, not being able to be exceeded, can, as a rule, be anticipated", provided that the act that is the object of the challenge has already been practiced.'" (Emphasis added).

Indeed, this is equally the position of established jurisprudence in the Supreme Administrative Court, which this Arbitral Tribunal considers should be applied to the present case, pursuant to which the understanding is expressed that:

"I - Having the administrative complaint as its object an assessment act, the object of the judicial challenge process of implied rejection of an administrative complaint, although formally is the implied rejection, is, indirectly, the assessment act that was the object of the complaint, and it is precisely this assessment act, in cases of implied rejection, the only one whose legality can be assessed in the judicial challenge process.

II - When an administrative complaint to an assessment act is submitted, the interested party may opt not to wait for the respective decision to be issued, being able to opt for the contentious challenge of the administratively challenged act, even before the legal period for deciding the complaint has expired, on the basis of the principle 'that periods, not being able to be exceeded, can, as a rule, be anticipated', provided that the act that is the object of the challenge has already been practiced." (Judgment of the Supreme Administrative Court issued in case No. 0734/08, of 17 December 2008)

Thus, and taking into account that the assessment act in question in these proceedings – the indirect object of challenge – whose illegality it is sought to declare in this request for arbitral establishment, was practiced on 28.12.2017,

... and that the implied rejection of the administrative complaint No. ...2018... was formed in August 2018,

... it is manifest that there is no lack of object of the present request for arbitral pronouncement, since the implied rejection has already been formed, and that, on the present date, this tribunal is in perfect conditions to assess the legality of the tax act in question.

It would be otherwise if the administrative complaint were assessed in favor of the taxpayer, a situation in which the judicial challenge or the present request for arbitral establishment would lose its usefulness.

Thus, and in accordance with the doctrine mentioned above, this Arbitral Tribunal endorses the legal position that "when an administrative complaint to an assessment act is submitted, the interested party may opt not to wait for the respective decision to be issued, being able to opt for the contentious challenge of the administratively challenged act, even before the legal period for deciding the complaint has expired, on the basis of the principle 'that periods, not being able to be exceeded, can, as a rule, be anticipated', provided that the act that is the object of the challenge has already been practiced.", for which reason it deems the exception invoked by the Respondent to be unfounded.

Thus, the exception of "lack of object of the request for arbitral pronouncement" raised by the Respondent is unfounded, for the grounds stated above.

IV. Disputed Issue

The following question is to be assessed and decided: whether the tax act, practiced by the TCA, which is embodied in the IRS assessment No. 2017..., relating to the year 2016, in the amount of € 42,812.84 (forty-two thousand, eight hundred and twelve euros and eighty-four cents), with € 42,087.52 corresponding to tax and € 725.32 to compensatory interest, is illegal, in view of the defects invoked by the Claimant.

Let us see,

The Claimant, in order to achieve its objective of seeing annulled, as illegal, the IRS assessment act No. 2017..., relating to the year 2016, in the amount of € 42,812.84 (forty-two thousand, eight hundred and twelve euros and eighty-four cents), with € 42,087.52 corresponding to tax and € 725.32 to compensatory interest, invokes two defects, namely:

a) omission of an essential formality; and

b) erroneous classification of the type of income.

Regarding the defect of omission of an essential formality, the Claimant argues that "[o]n 8 November 2017, in the context of the IRS assessment process initiated by the TCA, the taxpayer was notified to exercise the right to prior hearing, because the TCA identified the existence of possible discrepancies in the acquisition values and discrepancies in the year of acquisition of the properties. (doc. 5). On 22 November 2017, the present Claimant, in his capacity as head of the estate of the taxpayer, who had since passed away, exercised the right to prior hearing (Doc. 6)". (See Articles 13 and 14 of the request for establishment of the Arbitral Tribunal).

However, notwithstanding document No. 6 attached by the Claimant consisting of an email addressed to the Lisbon Tax Office, with the date of 22 November 2017, the truth is that from it it is not possible to determine and verify that the TCA actually received it, particularly because it is a fact disputed by the same, in the context of its Reply.

Indeed, and notwithstanding it being evident from the destination of the aforementioned email the electronic address of the Lisbon Tax Office, the truth is that the same may not have been received by it, for various reasons, such as, for example, going into SPAM, preventing its receipt and acknowledgment by the TCA.

As a matter of precaution, and in order to avoid situations such as those of the present proceedings, the taxpayer may/should, when not represented by a representative, proceed to deliver its petitions and/or other documents directly to the competent TCA Service, send them by mail, under registered delivery, or proceed to send them by facsimile, by virtue of through any of these means it being possible to obtain proof of effective receipt – which did not occur with the email dated 22 November 2017, here in question.

Thus, and in view of the fact that this is a disputed fact, and as the Claimant did not succeed in proving its actual delivery in the Respondent's email inbox, or having made the delivery by any other means, the Arbitral Tribunal deemed it appropriate to consider it as an unproven fact, with this argument put forward by the Claimant thus being unfounded.

Regarding the defect of erroneous classification of income, the Claimant argues, on the one hand, that "[o]n 27 June 2016, (...) in his capacity as representative of B..., he disposed of the quota share that his principal owned in the urban properties identified below: (...)]",

... being that, "[t]he quota share of the three properties previously identified had been acquired by B..., as heir of G..., who died on 26 March 1947."

Furthermore stating, the Claimant that "being thus, it is a notorious fact that the income earned in 2016, from the onerous disposal of the quota share of the 3 properties identified above, is not subject to taxation under IRS, by virtue of the provisions of Article 5 of Decree-Law No. 442-A/88 of 30 November."

However, already in the context of written arguments, and after document No. 6 was attached to the proceedings in legible form, the Respondent adds that "[a]ccording to the evidence adduced by the claimant, particularly document No. 6, it is apparent that the properties corresponding to the previous cadastral items No. 180 and 181 are 'land occupied by a property in ruins'. For purposes of exemption in the context of capital gains and under IRS, it was incumbent upon the Claimant to have adduced evidence that such properties (...) were urban properties and not land for construction, that is, to assess the exemption under IRS there would have to be evidence that prior to the entry into force of the IRS Code, which occurred on 1 January 1989, such land was classified as an urban property and not land for construction, since only the appreciation of such type of land was taxed in the context of the Capital Gains Tax."

Let us see,

The IRS Code provides in subparagraph a) of paragraph 1 of its Article 10 that "capital gains are understood as gains obtained which, not being considered as commercial, industrial or agricultural income, income from capital or real property, result from: a) onerous disposal of real rights over immovable property (...)."

However, and in the context of capital gains under IRS, one must take into account the transitional regime for category G income, provided for in Article 5 of Decree-Law No. 442-A/88, of 30 November, pursuant to which:

"1 - Gains that were not subject to the capital gains tax, created by the code approved by Decree-Law No. 46373, of 9 June 1965, become subject to IRS only if the acquisition of the goods or rights from whose transmission they derive was made after the entry into force of this Code.[01.01.1989]

2 - It is the responsibility of the taxpayer to prove that the goods or values were acquired on a date prior to the entry into force of this Code, with such proof being effected, as regards securities, through registration in accordance with the legally provided terms, deposit in a financial institution or other adequate documentary evidence and through any means of proof legally accepted in the remaining cases."

Now, the aforementioned regime refers to Article 1 of the Capital Gains Tax Code (CGTC), approved by Decree-Law No. 46 373, of 9 June 1965, in order to assess which gains, in the context of that statute, were not subject to capital gains tax (with reference to a moment prior to the entry into force of the IRS Code) and which, consequently, are eligible to benefit from the transitional regime of non-subjection to this tax.

That legal provision then provided, with interest, that:

"The capital gains tax applies to gains realized through the acts enumerated below:

1st Onerous disposal of land for construction, whatever the title by which it operates, when from it result gains not subject to the capital gains charges provided for in Article 17 of Law No. 2030, of 22 June 1948, or in Article 4 of Decree-Law No. 41 616, of 10 May 1958, and which do not have the nature of income taxable in industrial contribution.

(...)

§ 2nd. Land for construction is understood as that situated in urbanized zones or comprised in already approved urbanization plans and that so declared in the acquisition title."

Thus, in the field of the CGTC, only gains derived from the onerous disposal of land for construction were subject to capital gains tax and, therefore, only if the transmitted property possessed such a quality is the applicability of the transitional regime excluded.

Pursuant to established jurisprudence of the Supreme Administrative Court, the classification of the property as "land for construction" does not matter at the date of disposal,

... rather, it matters that it had such a classification on the date of entry into force of the IRS Code, that is, 01 January 1989, pursuant to Article 2 of Decree-Law No. 442-A/88, of 30 November, which approves it – see, among others, the Judgment of the Supreme Administrative Court issued in case No. 01565/13, of 22 April 2015.

Thus, we will have to determine whether any of the properties above identified, acquired in 1947 and disposed of in 2016, whose gains make up the basis of the assessment in question in these proceedings, could be classified as land for construction, on 01.01.1989, for purposes of capital gains tax in the context of the CGTC, from which we would conclude regarding the application or not of the transitional regime provided for in Article 5 of Decree-Law No. 442-A/88, of 30 December.

Now, upon review of the documents adduced for the proceedings, in particular Documents No. 2, 3 and 4 attached with the request for establishment of the Arbitral Tribunal, which relate to moments in time between 1947, 1996 and 2016, we can determine, in relation to each of the properties whose capital gain is at issue in these proceedings, that:

Property (No. entry - Doc. No. 4) Cadastral article in 1947 Cadastral article in 2016 Elements from the Certificate (Doc. No. 4 attached with the request for establishment of the Arbitral Tribunal) Elements from the disposal deed (Doc. No. 2 and 3 attached with the request for establishment of the Arbitral Tribunal)
8

From the characteristics set out in the table above, extracted from the documents attached to the proceedings, we observe that all the properties identified therein are urban properties, with it being evident that the property registered under article ... is an urban residential property – a fact that the Respondent does not contest – .

However, it is to be noted that nowhere in the characterization of the remaining properties (registered under articles ... and ...) can it be determined that any of them could be considered land for construction,

... precisely because such terminology/notation does not appear in the certificate issued by the Tax Office of ... on 13 February 1996, nor from the documents relating to 1947 (Doc. No. 4 attached with the request for establishment of the Arbitral Tribunal), nor even from the bills of sale of the aforementioned properties attached as Documents No. 2 and 3 with the request for establishment of the Arbitral Tribunal (notwithstanding it not being this the relevant moment for purposes of classification of the property regarding the application or not of the transitional regime here at issue).

Furthermore, as may be ascertained from Document No. 2 attached with the request for arbitral establishment, the properties registered in the respective cadastral register under articles ... and ... (former ... and ... respectively) the description in the cadastral record was "property in ruins (...) construction materials storage",

... that is, there is no indication that it was "land for construction".

It should be noted that if the said properties were classified as such, it would be the Tax Authority, responsible for the cadastral registers, which, in the absence of indication by the taxpayer in this regard, should have promoted such notation. – See the Property Tax Code in force on 01.01.1989, regarding the nature of properties[1].

Thus, taking into account that:

  • the 3 urban properties registered under articles..., ... and ... (articles..., ... and ..., in 2016) of the parish of ..., municipality and district of Lisbon, were acquired on 26 March 1947, by B..., by succession by virtue of the inheritance opened by the death of G..., by virtue of the partition process validated by judgment on 06.12.1948, which became final on 21.12.1948. – See Document No. 4 attached with the request for establishment of the Arbitral Tribunal – ;

  • the aforementioned properties were disposed of on 27 June 2016, by the Claimant, in his capacity as representative of B...,

  • none of the properties, on 01.01.1989, was "land for construction",

... it is manifest that the gain obtained by the taxpayer B... is not subject to IRS, by application of the transitional regime of Article 5 of Decree-Law No. 442-A/88 of 30 November,

... whereby the assessment act in question in these proceedings is partially illegal, as far as the taxation of the capital gain resulting from the disposal of the properties identified above is concerned, and the same should be annulled accordingly.

Finally, the Respondent requests, in case the present request for establishment of the Arbitral Tribunal is deemed founded, that the Claimant be held responsible for payment of the arbitration costs, "in that it was the Claimant who caused the official assessment".

Now, notwithstanding this Arbitral Tribunal not having deemed proven that the Claimant exercised the right to prior hearing in the context of the IRS correction procedure that gave rise to the challenged act, the truth is that, on the one hand, such right is optional, that is, the taxpayer is not obligated to exercise the right of participation that he holds pursuant to the provisions of Article 60 of the LGT, as it is in his free discretion whether to exercise it or not;

... on the other hand, the law does not provide any sanction for non-exercise of that same right;

... and finally, the Respondent had the necessary and sufficient elements – in particular, the certificate issued by the Tax Office of ... on 13.02.1996 – to proceed with the correct IRS assessment, it was only necessary for it to verify the specific situation, in compliance with the inquisitorial principle, provided for in Article 58 of the LGT, according to which: "[t]he tax administration must, in the procedure, carry out all necessary steps to satisfy the public interest and to discover the material truth, and is not subordinate to the initiative of the author of the request."

Thus, the request made by the Respondent regarding holding the Claimant responsible for payment of the arbitration costs is unfounded.

DECISION

In accordance with what has been stated above, it is decided:

  1. To judge unfounded the exception of lack of object of the request for establishment of the Arbitral Tribunal invoked by the Respondent;

  2. To judge the claim submitted by the Claimant as founded, and in consequence, to partially annul the IRS assessment act No. 2017..., relating to the year 2016, in the amount of € 42,087.52, accrued by € 725.32 as compensatory interest, expunging the gains arising from the disposal of the urban properties registered in the respective cadastral register under articles..., ... and ... of the parish of ..., municipality and district of Lisbon, and the non-subjection under capital gains;

  3. To declare the illegality and annulment of the act of (implied) rejection of the administrative complaint.

Value of the Proceedings

The value of the proceedings is set at € 42,812.84 (forty-two thousand, eight hundred and twelve euros and eighty-four cents) pursuant to Article 97-A, paragraph 1, a), of the CPTA, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the LRAT and paragraph 2 of Article 3 of the Rules of Costs in Tax Arbitration Proceedings.

Costs

Costs payable by the Claimant and Respondent, in proportion to their losses, in accordance with Article 12, paragraph 2 of the LRAT, Article 4 of the RCPAT, and Table I attached thereto, in the amount of € 2,142.00.

Let notification be given.

Lisbon, 14 February 2019

The Arbitrator

(Jorge Carita)

[1] Article 6 of the Property Tax Code which provided, under the heading "Categories of urban properties" the following:

"1 - Urban properties are divided into:

a) Residential;

b) Commercial, industrial or for the exercise of independent professional activities;

c) Land for construction;

d) Others.

2 - Residential, commercial, industrial or for the exercise of independent professional activities are buildings or structures licensed for such purpose or, in the absence of a license, which have such purpose as their normal destination.

3 - Land for construction is land situated within or outside an urban center for which a plot division permit has been granted, a project approved or a building license granted, and also those so declared in the acquisition title.

4 - The provision of subparagraph d) of paragraph 1 includes land situated within an urban center which is not land for construction and is not covered by the provision of paragraph 2 of Article 3, and also buildings and structures licensed or, in the absence of a license, which have as their normal destination purposes other than those referred to in paragraph 2."

Frequently Asked Questions

Automatically Created

What is the transitional regime for capital gains (mais-valias) under IRS Category G in Portuguese tax law?
The transitional regime for capital gains under IRS Category G in Portuguese tax law exempts from taxation capital gains arising from assets acquired before January 1, 1989 (when the capital gains regime was introduced). Properties inherited before this date, such as those acquired through succession in 1947 as in this case, qualify for exemption and should be reported in Annex G1 (untaxed capital gains) rather than Annex G (taxable capital gains). This regime protects taxpayers from retroactive taxation on appreciation that occurred before the legal framework existed.
How are capital gains from inherited assets taxed under Portuguese IRS rules?
Capital gains from inherited assets under Portuguese IRS rules depend on the acquisition date. If the original owner (de cujus) acquired the property before January 1, 1989, the gains are exempt under the transitional regime when disposed of by heirs. The heir steps into the shoes of the deceased for tax purposes, using the original acquisition date and value. If acquired after 1989, gains are taxable at 28% (or 50% can be included in general income), calculated as the difference between sale price and inheritance valuation or original acquisition cost.
Can taxpayers challenge IRS capital gains assessments through CAAD tax arbitration proceedings?
Yes, taxpayers can challenge IRS capital gains assessments through CAAD (Centro de Arbitragem Administrativa) tax arbitration proceedings under Decree-Law 10/2011 (RJAT - Legal Regime for Arbitration in Tax Matters). Article 2(1)(a) and Article 10(1)(a) of RJAT provide jurisdiction for challenging tax assessment acts (actos de liquidação). Heirs acting as heads of estate have standing to request arbitral review of assessments issued against deceased taxpayers' estates, as demonstrated in this process where the claimant represented the estate in challenging the IRS liquidation.
What was the outcome of CAAD arbitration process 288/2018-T regarding the IRS capital gains liquidation of €42,812.84?
The decision excerpt does not provide the final outcome of CAAD process 288/2018-T. The document shows the procedural history through November-December 2018, with the arbitral decision scheduled for February 28, 2019. The claimant sought annulment of the €42,812.84 IRS assessment (including €42,087.52 in tax and €725.32 in compensatory interest) based on omission of essential formalities and erroneous income classification. The tribunal accepted jurisdiction, received submissions from both parties, and dispensed with an oral hearing, but the substantive ruling is not included in this excerpt.
What legal basis allows heirs to request arbitral review of IRS tax assessments under the RJAT framework?
Article 2(1)(a) and Article 10(1)(a) of Decree-Law 10/2011 (RJAT) provide the legal basis for heirs to request arbitral review of IRS assessments. Heirs acting as 'head of estate' (cabeça-de-casal) have legal standing to represent the deceased taxpayer's interests and challenge tax acts issued against the estate. The RJAT framework allows arbitration of disputes concerning the legality of tax assessment acts, including those related to IRS. The heir must comply with formal requirements including payment of the initial and subsequent arbitration fees under the Rules of Costs in Tax Arbitration Proceedings.